Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Financial Management
Introduction to Finance Finance Functions- Three approaches I-Provision of money at the time it is wanted. 2- Management of Cash and maintaining the liquidity of funds. 3- Procurements of Funds as well as their effective utilization & Financial decision making.
Contd.
In simple terms finance is defined as the activity concerned with the planning, raising, controlling and administering of the funds used in the business. Thus, finance is the activity concerned with the raising and administering of funds used in business
International Finance
Capital markets have become globally integrated. Indian companies raise equity and debt funds from international markets, in the form of Global Depository Receipts (GDRs), American Depository Receipts (ADRs) or External Commercial Borrowings (ECBs) and a number of hybrid instruments like the convertible bonds, etc., Access to international markets, both debt and equity, has enabled Indian companies to lower the cost of capital. For example, Tata Motors raised debt as less than 1% from the international capital markets recently by issuing convertible bonds. Finance managers are expected to have a thorough knowledge on international sources of finance, merger implications with foreign companies, acquisitions abroad and international transfer pricing. The implications of exchange rate movements on new project viability have to be factored in the project cost and projected profitability and cash flow estimates. This is an essential aspect of finance managers expertise
Basic Objectives
1.Profit Maximization - Traditional objective. The arguments put in support of Profit Maximization are Profit is a prime motive or incentive, which contributes to better and more efficient performance. Efficient allocation of scarce resources and their judicious utilization are based on the basis of profit criterion. Profit maximization ensures maximum return to the shareholders, prompt payment to creditors, better wages and working conditions for labour. Without the objective of profit maximization, there will be no place for competition in business, which is quite essential for the successful functioning of an economy.
All business decisions are taken keeping in view the objective of profit maximization. So, profit maximization has become a part of decision-making process. Profits are the main sources of finance for the growth and efficiency of a business. Profits serve as a protection against risks. Profit is not only an objective, but also a measuring rod or criterion of efficient, effective and economic utilization of financial resources by the management. Profit maximization is a proper test of the economic efficiency of a firm. Earning of profits is necessary for fulfilling social goals The concept of profit maximization is the simple and straightforward statement of the objectives.
Contd.
The concept of profit maximization ignores the factors of risk and uncertainty. That is, the profit maximization concept considers profit maximization as the only objective of a business undertaking, and ignores the factor of risk and uncertainty to which a business unit is exposed. But profit maximization cannot be the only objective of a business unit, as there is direct relationship between uncertainty and risk and profit. A business unit is not run solely with the objective of earning the maximum profits possible. There are firms, which are prepared to accept lower profits in order to have growth in the volume of sales and to have stability. There are some firms, which undertake some projects, which may yield lower profits, but contribute to social welfare. Further, profit maximization at the cost of social and moral obligations and ethical trade practices is not a good business policy. All these qualitative aspects of business activities are ignored by the concept of profit maximization.
Contd
Contd
Again there are several forces, which work against the objective of profit maximization. They are Profit maximization involves an element of risk. Higher profits involve greater risk. So a business would like to have normal or fair profit rather than maximum profit Many firms would like to have greater liquidity rather than locking their funds in increased production activities to earn maximum profits. When a firm maximizes its profits, the workers of the firm would demand higher wages, more bonus, etc. When a firm maximizes its profits and exploits the workers, consumers, etc., there is the threat of government interference in the form of more taxes, strict regulatory measures and even nationalization of the firm. Profit maximization may lead to exploitation of workers and consumers. Profit maximization leads to social inequality. The effect of dividend policy on the market price of shares is not considered in the objective of profit maximization.
Contd
To conclude, the profit maximization criterion is inappropriate and unsuitable as an operational objective of investment, financing and dividend decisions of a firm. It is not only vague and ambiguous but it also ignores two important dimensions of financial analysis, namely, risk and time value of money
The wealth maximization concept considers the time value of money. This concept takes into account the risk factor. It gives due weightage to the risk factor by applying different rates of discount, while discounting the cash flows or cash benefits from the projects. This concept allows dividend policy of the company to have its effect on the market value. The objective of wealth maximization also contributes to the maximization of other objectives of financial management Wealth maximization objective not only serves the interests of the shareholders by increasing the value of their holdings, but also ensures security to the lenders.
The concept of profit maximization On the other hand, wealth maximization ignores the factors of risk and uncertainty. concept takes into account the risk factor by applying different rates of discount, while discounting the cash flows form projects The objective of profit maximization is concerned with the maximization of profits. Profit maximization concept is vague, But the objective of wealth maximization also contributes to the maximization of other objectives of financial management where wealth maximization concept is very clear and not vague.
Other objectives
Ensuring a fair return to share holders Building up of reserves for growth and expansion Ensuring maximum operational efficiency and effective utilization of finances Ensuring financial discipline in the organization
Executive functions
Financial forecasting Investment decisions To manage corporate asset structure The management of income Management of cash Deciding about new sources of finance To contact and carry negotiation for new financing Analysis and appraisal of financial performance Advising the top management
Routine functions
Estimating the total requirements of funds for a given period. Raising funds through various sources, both national and international, keeping in mind the cost effectiveness; Investing the funds in both long term as well as short term capital needs; Funding day-to-day working capital requirements of business; Collecting on time from debtors and paying to creditors on time; Managing funds and treasury operations; Ensuring a satisfactory return to all the stake holders; Paying interest on borrowings;
2. 3.
4. 5.
after taking the time value of the money into account. Financing decisions through a balanced capital structure of Debt-Equity ratio, sources of finance, computations of EBIT,EPS, interest coverage ratio etc. Dividend decisions, issue of Bonus Shares and retention of profits with the objective of maximization of market value of equity share. Best utilization of fixed assets. Efficient working capital management (inventory, debtors, cash, marketable securities and current liabilities).
Capital Budgeting Decisions Return Capital Structure Decisions Market Value of the Firm Dividend Decisions Risk Working Capital Decisions
ORGANISATION OF FINANCE FUNCTION Since finance is major/critical functional area, the ultimate responsibility for carrying out financial management functions lies with the top management, ie., board of directors /managing director/chief executive or the committee of the board. However, the exact nature of the organization of the financial management function differs from firm to firm depending upon factors such as size of the firm, nature of business, type of financial operations, ability of financial officers and the financial philosophy, and so on.
ORGANISATION OF FINANCE FUNCTION(Contd..) Similarly, the designation of the chief executive of the finance department also differs widely in case of different firms. In some firms, they are known as finance managers, while in other cases as vice-president (finance), director (finance), and financial controller and so on. He reports directly to the top management. Managers such as controller and treasure head various sections within the financial management area
Three people check into a hotel. They pay Rs.30 to the manager and go to their room. The manager suddenly remembers that the room rate is Rs.25 and gives Rs.5 to the bellboy to return to the people. On the way to the room the bellboy reasons that Rs.5 would be difficult to share among three people so he pockets Rs.2 and gives Rs.1 to each person. Now each person paid Rs.10 and got back Rs.1. So they paid Rs.9 each, totaling Rs.27. The bellboy has Rs.2, totaling Rs.29. Where is the missing Rupee 1?